As the holiday lights start to fade, we come to one of the most anticipated times of the year – bonus season!

Such a happy time. Who doesn’t love getting a bonus, and what employer doesn’t like rewarding good performance with some extra monetary recognition? Bonuses are great, but keep in mind that they also carry some legal obligations. In the case of non-exempt employees, that might include paying additional overtime based on your bonus payment. The FLSA requires employers to pay overtime based upon an employee’s “regular rate” of pay. The regular rate is not simply the employee’s base hourly pay rate. Rather, it is the rate calculated by adding up all of an employee’s non-overtime compensation for each workweek, then dividing by the total hours worked during the workweek. Non-discretionary bonuses are part of an employee’s total compensation, so must be included in this calculation even if the bonus is not calculated or paid out until after the employee’s regular pay.

“Ha!”, you might be thinking to yourself as you read this, “we don’t have to do that because our bonus policy says right in the title that bonuses are discretionary.” You might be right, but it’s not quite that simple. The FLSA regulations (specifically 29 C.F.R. § 778.211), discuss which bonuses can be considered “discretionary”:

 In order for a bonus to qualify for exclusion as a discretionary bonus under section 7(e)(3)(a) the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it. Thus, if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment by promising a bonus to his employees. Such a bonus would not be excluded from the regular rate under section 7(e)(3)(a). Similarly, an employer who promises to sales employees that they will receive a monthly bonus computed on the basis of allocating 1 cent for each item sold whenever, is his discretion, the financial condition of the firm warrants such payments, has abandoned discretion with regard to the amount of the bonus though not with regard to the fact of payment. Such a bonus would not be excluded from the regular rate. On the other hand, if a bonus such as the one just described were paid without prior contract, promise or announcement and the decision as to the fact and amount of payment lay in the employer’s sole discretion, the bonus would be properly excluded from the regular rate. (Underlining added.)

In sum, a bonus is not “discretionary” under this rule if an employer either commits in advance to paying a bonus or states the amount of the bonus or method of calculation in advance. Merely sticking a disclaimer at the end of your bonus policy or calling your bonuses “discretionary” doesn’t necessarily make it so.

So what if your bonus plan is non-discretionary – how do you calculate any overtime due? Look for a later post with the answer to that question, including a method of calculating bonuses that might allow you to skip the extra math altogether.